S&P Places Atlas Pipeline Partners (APL) on CreditWatch Negative

Standard & Poor's Ratings Services today placed the 'B+' corporate credit and senior unsecured ratings on Atlas Pipeline Partners L.P. (NYSE: APL) on CreditWatch with positive implications. We also revised the CreditWatch listing on the 'B' corporate credit and senior secured ratings on Atlas Energy L.P. to developing from negative. At the same time, we placed our 'BB+' corporate credit and senior unsecured debt ratings on Targa Resources Partners L.P. (Targa) on CreditWatch with positive implications.

"The positive CreditWatch on Atlas Pipeline and its unsecured debt reflects our expectation that we will raise the ratings in line with those of Targa," said Standard & Poor's credit analyst Nora Pickens. "Atlas Pipeline will be integrated with Targa's operations, with Targa assuming Atlas Pipeline's adjusted debt of about $1.8 billion," said Ms. Pickens.

The existence of material asset value at both Atlas Pipeline and Targa to support their respective debt claims alleviates potential structural subordination related concerns should Atlas and Targa decide not to cross-guarantee each-others debt. In our view, Atlas Pipeline's assets are located in favorable basins with compelling drilling economics, characterized by high utilization (about 93% to date in 2014) and strong gathering and processing volumes across the firm's operating footprint. The partnership continues to grow rapidly in tandem with robust production forecasts and we expect 2014 gathering volumes to be nearly three times greater than those of 2011. Despite favorable drilling fundamentals, a slower-than-anticipated build-out of assets, meaningful amounts of ethane rejection, and the need to offload gathering volumes to third parties have contributed to compressed margins and lower cash flow. However, we believe this will partially abate in 2015.

The positive CreditWatch on Targa reflects our expectations that we could raise ratings to 'BBB-' once we become sufficiently confident that the proposed merger will close. The merged entity benefits from increased scale and diversity and is expected to have moderate leverage, with pro forma debt to EBITDA of about 3.9x in 2015, before declining to 3.5x in 2016.

In our view, the transaction complements Targa's core competencies in the gathering and processing business, enhances its asset position in the Permian Basin, and expands its operating footprint to attractive regions such as the Anadarko Basin and Eagle Ford Shale. Pro forma for the transaction, we expect fee-based arrangements to represent about 60% of the partnership's operating margins and that Targa will continue to manage its commodity risk in a disciplined manner.

We expect to resolve the CreditWatch listings on Targa, Atlas Pipeline, and Atlas Energy once we have better insight into the transaction's timing and final terms. We anticipate that if we raise the corporate credit rating on Targa, we would limit it to one notch.

Key points:

• Targa Resources Corp., the general partner of Targa Resources Partners L.P. (Targa), has executed a definitive merger agreement to acquire Atlas Energy L.P.'s incentive distribution right, limited partner, and general partner interests in Atlas Pipeline Partners L.P. for $1.9 billion. Immediately before closing, all non-Atlas interests (primarily exploration and production-related), will be spun off to Atlas Energy unitholders.
• As part of the transaction, Targa will acquire Atlas in a unit-for-unit transaction, including $1.8 billion of debt.
• We are placing Atlas Pipeline's 'B+' corporate credit and senior unsecured ratings on CreditWatch with positive implications, reflecting our expectation that we will raise its ratings in line with those of Targa.
• At the same time, we are revising the CreditWatch listing on Atlas Energy's 'B' corporate credit and senior secured ratings to developing from negative. Atlas Energy will be merged into Targa Resources Corp., which is currently unrated.
• We are placing Targa's 'BB+' corporate credit and senior unsecured rating on CreditWatch with positive implications.

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